Severance pay for the unemployed

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On Dec. 29, the federal program to extend unemployment insurance benefits will end, unless Congress votes to renew it once again. Federal lawmakers have passed 10 such extensions since 2008, but the financial and social costs of paying people not to work are too high to justify extending the program indefinitely. Congress should go back
to the 26-week limit
that prevailed before the recession — but do so humanely, by giving a single, sizeable lump-sum payment to those whose benefits run out in December.

Unemployment insurance has two upsides.
The main one is that people who are laid off suffer a little less, which also makes people who still have jobs feel more secure. A secondary advantage, widely touted at the low point of the recession, is that unemployment insurance gives cash-strapped people some extra money that they quickly spend — which in turn helps boost consumer spending and economic activity.

Yet these benefits involve significant costs; the most
obvious one is that taxpayers foot the bill. Between 2008 and 2010, unemployment insurance spending swelled from $43 billion to $157 billion. More important, though, may be the secondary cost — the incentive that extending unemployment insurance creates to spend years out of work. Since benefits cease when you take a job, unemployment insurance essentially bribes people not to work.

The most famous paper documenting this fact was written by economist Bruce Meyer 20 years ago, who found that unemployment insurance recipients are three times more likely to get a job when their benefits are about to run out. Extending unemployment insurance always ran the risk of inducing long-run unemployment, which is particularly harmful if joblessness becomes a permanent lifestyle, as it has for many people in some European nations.

When the Great Recession hit, many policy makers thought that most unemployed workers couldn’t find jobs, no matter how hard they tried; many news outlets highlighted the plight of workers who applied unsuccessfully for dozens of jobs. Under these conditions, the argument went, unemployment insurance extensions would do little to encourage people to stay unemployed longer.

But unemployment insurance, according to one recent paper using German data, has about the same effect in good times and bad — a relatively moderate increase in the length of spells of non-employment.

In June 2008, there were 1.6 million Americans who had been unemployed for more than 27 weeks. As the recession deepened and unemployment insurance durations lengthened, the number of long-term unemployed grew to 6.7 million by April 2010. That figure more than doubles the previous recorded high of 2.9 million long-run unemployed reached in 1983. Today, despite the recovery, the number of long-term unemployed remains over 5 million.

Economists disagree about exactly how much unemployment insurance extensions have contributed to this situation. My Harvard colleague Robert Barro has argued that “dramatic expansion of unemployment-insurance eligibility to 99 weeks is almost surely the culprit.” Berkeley’s Jesse Rothstein uses the state-level differences in unemployment insurance policies to assess this view and finds that “unemployment insurance benefit extensions raised the unemployment rate in early 2011 by only about 0.1 to 0.5 percentage points.” It does seem clear that the benefit extensions have kept at least some people from finding new work.

Congress now seems to face two bad options: extending unemployment insurance, which would increase the government’s fiscal problems and keep the perverse incentives that encourage long-run unemployment; or not renewing the unemployment insurance extension, which will create hardship for millions of unemployed workers and their families. But there is a middle ground.

Instead of renewing the unemployment insurance extensions or, at the other extreme, letting benefits cease abruptly, Congress can end the extension while also providing workers who will lose their benefits with a severance payment — perhaps equal to three months of coverage. Workers will get this payment whether they find jobs or not. The package could be structured as a one-time payout, which would lower administrative costs and encourage holiday spending, or as continuation of unemployment insurance payments, which are paid whether the beneficiary gets a job or not.

A flat payment can aid the unemployed this winter without encouraging long-run joblessness. Nothing is more important that getting people back to work. We should adjust any policy, like the continuing series of unemployment insurance extensions, that works against that aim.

Edward L. Glaeser, an economist at Harvard, is the director of the Rappaport Institute for Greater Boston.

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